Operate To Sell
Operate to Increase Income. Not to Optimize Stability.
Owners who plan to sell their apartment assets should run their properties differently than owners who do not intend to sell.
Why is that?
Many owners who plan to hold long-term keep rents slightly below market. They don’t want to risk unnecessary disruptions in occupancy for the sake of a marginal increase in monthly revenue.
They also spend more on maintenance. Keeping the building in good condition for the long term makes more sense than maximizing net income on their P&L. Plus, there are tax advantages to running the building at a lower net income. Lower taxable income reduces your bill to Uncle Sam.
But when it's time to sell, you need to shift gears.
Buyers will scrutinize your financial statements to assess the property’s value. To get the best deal possible, you need to get your revenue up and your expenses down.
This is the part many sellers get wrong.
In the months leading up to a sale, they continue to operate as they always have. Then they go to market with below-market rental revenue and heavy operating expenses on their P&L.
Buyers spend the first two minutes looking at your deal and making assumptions about your property. If your asset appears to be underperforming, they make quick valuation judgments based on your current net operating income.
I recommend you change the way you operate your property in the 6 to 12 months leading up to a sale.
If it's your first time selling or it's been a while since you sold a property, these strategies will optimize your property for the best possible sale price.
Here’s how to do it.
Step 1: Increase Rents
Yes, pushing up rents is not always easy. It can feel uncomfortable to increase your tenants’ monthly expenses. And your vacancy and turnover costs might increase in the short term.
However, getting your rents to market rates is essential to increase the value of your property.
In markets like the Twin Cities, apartment buildings typically sell for 8 to 10 times their annual revenue. This means every dollar you increase monthly rent translates to an 8 to 10x bump in your property’s value.
Let’s look at a simple example.
Say you have a 10-unit property with rents averaging $1,000 per month. Your total annual revenue is $120,000. At a 9x revenue multiple, your property is worth $1,080,000.
Now assume you push rents to $1,200 per month and your projected annual revenue jumps to $144,000. At the same 9x revenue multiple, your property value soars to $1,296,000. That’s an increase of $216,000 just by adjusting rents.
Increasing rents will likely increase vacancy and turnover costs in the short term, but if you’re planning on selling the asset, the gain in value is worth it.
Step 2: Minimize Operating Expenses
Once you've increased rents, focus on trimming your operating expenses. This further boosts your net operating income (NOI), which buyers use to evaluate your property.
Here is how to do it.
Review Fixed Costs - Make sure property taxes and insurance are not excessively high. Consider appealing your property taxes and getting an updated insurance quote.
Manage Utilities - Evaluate utility reimbursement programs. While tricky to implement, they can significantly reduce your utility costs if done right.
Front-Load Repairs - Take care of deferred maintenance many months before listing your property. Then show a trend of lower maintenance costs in the few months leading up to your sale.
When you increase your revenue and decrease your expenses your net operating income goes up, and so does the value of your property.
The goal is to present a property that is financially attractive to buyers.
If you’re planning on selling your apartments, start running your property to maximize the bottom line.
Final Tips
Plan Ahead - Start these changes 6 to 12 months before you plan to sell. This gives you time to adjust and show a positive trend in the financial performance of your asset.
Document Everything: Keep thorough records of all improvements you implement in the 6 to 12 months leading up to a sale. Help buyers justify a higher price by providing transparency and proof of your property’s value.
By strategically increasing rents and minimizing expenses, you set your property up for a successful sale.
Remember, running your property like you're going to sell means making smart, intentional changes that maximize its value.
